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Freeport-McMoRan $FCX, the world's biggest publicly listed copper producer, released its quarterly results before the markets opened on Thursday. The strength in copper has been boosted by a weaker USD and China's economy.

Freeport McMoRan Copper Mine

Reaction: Freeport-McMoRan Inc NYSE: FCX

Pre market $20.04 +0.44 (+2.24%)

Since $FCX swung to a profit in 2Q17 after a loss the year earlier shares have been heading higher, up 19% in the last 12 months

Earnings:

Net income of $1.0 billion, or 71 cents a share, down from $1.8 billion, or $1.25 a share, in the year-earlier period. Adjusted for tax-related benefits and environmental charges, EPS was 51 cents beating Factset consensus of 48 cents.

Revenue rose to $5.041 billion from $4.377 billion beatinge FactSet consensus of $4.883 billion.

Chief Executive Richard Adkerson cited an improving copper market, which is expected to persist in 2018.

Outlook

$FCX forecasts consolidated sales in Fiscal 2018:

  • 3.9Bil pounds of copper sales
  • 2.4MM ounces of gold sales
  • 91MM pounds of Molybdenum sales

For 1Q18, sales of copper, gold and molybdenum are estimated to be 1Bil pounds, 67,500 ounces and 24MM pounds, respectively.

How to value Freeport-McMoRan 

Valuing $FCX as an investment, or a short for that matter means understanding what they went through since 2011 and what they have done to dig out of that hole. There is of course the all important stock market and commodity specific risk to consider all so.

Freeport's earnings have been hammered by write-offs, in 2016 the company reported a loss of $4.1 billion, or $3.16 per share. What saved them was they still had  $3.7 billion of operating cash flow.

The affect of asset sales

Unfortunately for FCX they were not able to benefit from the copper prices as much as they would like in Q217 as copper sales have declined to under 3.9 billion pounds  from 4.65 billion pounds in 2016. This has much to with asset sales, quality assets sold off to pay down debt. 

Feeport-McMoRan debt load and why $FCX company has a massive hole of unproductive debt, yes it has been cut down but is still huge and good assets have gone as we saw with copper sales. Net debt is down from $20 billion to $11.8 billion over the past year. The forecast is for its leverage ratio to average around 1.5 times this year, high in a cyclical bear commodity market. Where the massive debt and losses come from is a concern for investors as the question is how did commodity experts get it so wrong.

In other words are they good managers?

Freeport-McMoRan did two massive deals in 2012 when oil was over $100 a barrel and natural gas was at $4.50 per million Btu. The deals were for over $20 billion. Copper was $3.50 per pound and gold $1,500 per ounce at the time. Of course as history showed us that was around the peak and the commodity rout took hold. The deals were closed mid-2013 and the massive overpay has wreaked havoc. To pay down debt in 2014 it sold its Eagle Ford Shale assets to Encana $ECA for $3.1 billion.

While they used half to buy Gulf of Mexico assets from Apache $APA.  Earlier this year $FCX sold its California onshore oil and gas properties to a private buyer for $720 million.  Freeport-McMoRan has raised only $4.4 billion from those oil and gas assets from 2012. There are some oil properties left. Thats a huge chunk gone. $FCX also had equity raisings yet the debt level was still $15.4 Billion of debt at the end of 2Q17 with $4.7 Billion in cash. 

Geopolitical Risk

Global commodity companies have another risk, geopolitical. Freeport-McMoRan this year had a number of disputes at its Grasberg Mine in Indonesia (image above). In January $FCX suspended copper exports due to a contract dispute with the government. It took until April for exports to flow again. The Indonesian government agreed to allow the company to continue shipping for six months while it negotiated a new operating license with FCX. Hence the issue remains a risk and unresolved.

Then as soon as exports were back on in May more than over 5,000 workers at the mine went on strike. An added risk to the mine and therefore the firm's cash flow.

Of course the flipside is should Freeport-McMoRan resolve these issues, earnings keep improving and debt paid down they do appear cheap relative to their major competitors like the Australian mining giants $BHP and Rio Tinto $RIO on several measure. There is the added risk of will they replicate the same type of errors again? Are they good commodity managers?

Sources: FCX Presents at Deutsche Bank 2017 Global Industrials and Materials Summit, Reuters

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